Why reinvent the wheel?

If, as industry figures increasingly tend to show, defined contribution(DC) pension schemes are the way forward and defined benefit (DB) schemes are going to continue to wither on the vine, then it is time for some radical thinking about what the future should look like.

The marketplace is awash with new ideas and the government is falling over itself to come up with new initiatives, but the question has to be asked: why re-invent the wheel?

There are serious issues to be addressed, such as mandatory contributions from the outset of schemes, default retirement ages, means-tested benefits and the use of contract-based arrangements rather than introducing the National Employer Savings Trust (Nest).
This article examines many of the pressing challenges facing the pensions industry today and proposes some radical and innovative solutions.

If we accept that DC provision is likely to be the cornerstone for occupational pension provision ongoing, why has the government felt it necessary to establish an oversized, trust-based scheme at fantastic expense when we already have existing contract-based products in the marketplace that more or less fit the bill? And, especially as there appears to be some lack of enthusiasm to administer them.

Interestingly, Simon Richards, business delivery director at the Personal Accounts Delivery Authority (PADA) has said of PADA developing “a new system to administer personal accounts” (now known as NEST).
“This means that rather than buying a new IT system, PADA will use the technology and business processes of existing firms.” Is that the sound of pennies dropping a bit late in the day?

The government wants something “easy to understand and accessible” – companies (except for the very small employers) are already obliged to offer stakeholder schemes where no other provision exists. How much more access to employer-sponsored arrangements is necessary, and how is introducing yet another form of pension provision going to make it easy to understand?

A nice piece of joined up thinking might be to take the National Association of Pension Funds’ idea of kite marking but rather than focus on the employer, for contract-based arrangements focus on the provider. Review the provider communication, web based access, flexibility, fund choice, charges, performance etc. and kite mark that arrangement. That way, employers (particularly small-to-medium enterprises that don’t have self-administered DC arrangements and to which, it might be argues, Personal Accounts are targeted at) can pull a product off the shelf to use to facilitate compliance with “compulsion”. If they have an existing contract based-arrangement in place, it would be down to the provider to make sure that arrangement was able to be kite-marked and so the employer was able to comply.

On the issue of “compulsion”, procrastination is the thief of time or, in this case, future financial security – notwithstanding previous comments; lack of compulsion to contribute left stakeholder schemes dead in the water (except as a cheap and cheerful replacement for closed DB arrangements).

Let’s just bite the bullet and impose mandatory contributions from the outset. If there are concerns this will create a cliff edge increase in employer/employee costs, put in place some transitional tax reliefs. Making it ‘opt out’ rather than ‘opt in’ may result in inertia and, as such, some increase in those employees contributing to work based schemes. But while there is a get-out clause, those employees who are minded to maintain current spending power at the expense of the future will still do so.

Any form of means tested state benefit in retirement also needs to be scrapped. There are two issues: the first that pensioners don’t claim all the benefits to which they are entitled because the process is too complicated (for example, pensions credit); the second that they could end up paying into a scheme for nothing, because they believe that by having some form of private provision, this will impact of the amount of state benefit they may be able to claim. There needs to be a simple structure as to what any individual is entitled to from the state and this should not be impacted by any other legitimate post-retirement income they may have in place.

Finally, let’s scrap any idea for a default retirement age including a default state retirement age. The only test should be whether an individual can do the job? Does the job legitimately exist? Do they want to do the job? I accept that there appears to be some reluctance amongst employers to embrace this idea, but I suspect this is just a mindset – I have yet to see a reasonable explanation as to why a default retirement age is deemed necessary.

It must be recognised that, in the future, it will no longer be the case of work, retire and die – the edges will become somewhat blurred. Individuals should be free to plan their retirement and look holistically at all sources of revenue – pensions, savings, equity release, part time/full time working and state benefits. They should be free to mix and match to create the required level of income at any point in time. This should include the option to draw state benefits at any age, appropriately adjusted to reflect the length benefits will be paid, and/or to take part of any state entitlement and defer the rest – i.e. fully flexible retirement for state benefits.

The pensions landscape is changing. Financial security in old age has always been a three-way deal between the individual, their employer(s) and the state. Increasingly, individuals are taking on more of the responsibility and this message needs to be communicated both well and quickly. However, collectively we must also consider more imaginative solutions to the question of the country’s financial future and not rely on a re-hashed, unnecessary DC model?